Industrial policy in production networks: which sectors to promote in Brazil?

This paper presents the theoretical framework developed by Liu (2019) for analyzing the impacts of industrial policy, with applications to South Korea, China, and Brazil. Using a general equilibrium model that incorporates market imperfections and input-output linkages, Liu (2019) demonstrates the existence of a synthetic measure – distortion centrality – related to a sector’s position within the production network. This measure indicates: a) which sectors should receive targeted subsidies; and b) the optimal priority ranking among them. We discuss Liu’s (2019) main findings when applying this framework to assess industrial policies in South Korea during the 1970s and in modern-day China. The results show a strong correlation between the sectors prioritized in these historical experiences and the ranking recommended by the theory. As an original empirical application, we compute the sectoral ranking for Brazil in 2019, identifying the industries that, according to this framework, should be prioritized for government support. The key findings are: i) industrial sectors dominate among those classified as high-priority, but some industries fall outside the group recommended for subsidies; ii) in the service sectors, there are both intermediate-priority sectors and those for which government support is not advised; and iii) agricultural sectors are within the eligible range for support but rank at the lower end of the priority scale.